Semiconductor Sector (NFTRH 535 Excerpt)

By NFTRH

As in January of 2013 (ahead of an economic up cycle) and Q4 2017-Q1 2018 (ahead of an economic ripple that began in 2018) the Semiconductor sector and in particular its Semi Equipment sub-sector are front and center in forming our analysis about coming events. Excerpted from the January 20th edition of Notes From the Rabbit Hole, NFTRH 535

Semiconductor Sector – Watch the Early Bird in 2019

This one is special for me. I started my work life many moons ago as a participant with the Semi sector [circa 1983-1993], painfully learning first hand how violent the cyclical turns can be. Dialing ahead a couple decades, in January of 2013 NFTRH began a narrative that saw the then up-turning Semi Equipment bookings (this data is unfortunately no longer published) lead the sector, general manufacturing and eventually the whole raft of components that make up the economy into a cyclical up-turn.

Continue reading Semiconductor Sector (NFTRH 535 Excerpt)

Semi Sector: A Warning or a Buy?

By NFTRH

We began tracking this negative divergence in NFTRH last year as the leadership of two premier Semi Equipment companies began to decelerate vs. the broad sector.

amat/smh ratio

Over time the ugly patterns became even uglier with breakdowns to new lows. This chart shows that ugliness but more importantly it tries to illustrate AMAT & LRCX as leading indicators for the broad markets. In 2013 it was a big part of the macro signaling that told us to prepare for a coming economic upturn. In late 2015 it told us that the market top of that time probably was no such thing.

Continue reading Semi Sector: A Warning or a Buy?

A Bull in a China Shop

By NFTRH

Following is the opening segment of this week’s edition of Notes From the Rabbit Hole, NFTRH 504. For months now we have been tracking a divergence in the key cyclical Semiconductor Equipment segment (I am short AMAT & LRCX) to the broader Semi sector and this week put more context to the divergence.

A Bull in a China Shop

In light of the developing trade war between the US and China, let’s review the all-important Semiconductor sector and in particular, the Semi Equipment segment, which is a key economic early bird (and canary in a coal mine).

Various sectors took hits on Friday as Trump moved forward with Tariffs on China. But most of those sectors and industries are follow-on aspects of the economic cycle, which got its start when the early bird chirped in early 2013.

With China in Trump’s crosshairs and China a very key player in Semi Fab Equipment, there is a fundamental reason that the Equipment companies are faltering. From SEMI by way of a post at nftrh.com in March.

“SEMI predicts Samsung will lead the pack in fab equipment spending in both 2018 and 2019, even though it will invest less each year than in 2017. By contrast, China will dramatically increase its year-over-year (YOY) fab equipment spending for the next two years – by 57 percent in 2018 and 60 percent in 2019 – to support fab projects from both overseas and domestic companies. The China spending surge will thrust it past Korea as the top spending region in 2019.”

The rate of Semi Fab spending growth was easing and a heavy reliance was being put on China to pick up the slack. Here is a screenshot from that post…

Continue reading A Bull in a China Shop

Semiconductor Canaries: Chirp, Warble… Soon a Croak and Silence?

By NFTRH

In light of earnings reactions in the Semiconductor Equipment sector, it’s time for an update of a theme we have had in play since November, 2017

The canary is no longer chirping in a healthy manner and the economy’s coal mine has a toxic gas leak. While the recent Lam Research (LRCX) earnings report was pretty good and there were positive aspects to that of Applied Materials (AMAT), these highly cyclical companies that have been at the front end of the entire economic cycle that had its beginnings in 2013 are showing signs of wear.

Business is still good but when you are talking about cyclical leaders, it is growth rate that matters. I have read article after article touting strong current business and future drivers that will change the typical Semiconductor cycle as next generation Fabs are needed for ever more dynamic specialty chips for higher-end devices.

Applied Materials Slides After Softer Q3 Forecasts on Weaker Smartphone Demand

“Smartphone sales have been below expectations, particularly for high-end models, and in response, both semiconductor and display suppliers have made adjustments to their capacity planning,” CEO Gary Dickerson told investors on a conference call. “With inventory rebalance that we’re seeing from smartphones, we’re going to see a sequential dip in the Q3. But from our guidance into Q4, you can see that it recovers nicely into Q4.”

Taking the pulse of the analyst community, from the large houses to the boutiques to the chattering blogosphere, the theme seems to be that a buying opportunity is developing for the likes of AMAT and LRCX, two excellent companies. If you take Applied CEO Gary Dickerson’s view at face value, a decline in these stocks would be exactly that, an opportunity.

But as someone from the real world (as opposed to the Armani wearing analyst community) I can tell you that these companies have no better visibility than you or I. How can they? The global macro economy is subject to many inputs and if future outcomes were that easy to read, we’d all be rich beyond our wildest dreams because we’d have already seen around every corner. The global economy, while healthy now is not immune to the business cycle.

So here is a corner to look around. In NFTRH we began using this chart in Q4 2017 after a major financial media outlet published an article touting these two companies as great values for great investment returns in 2018. Leadership by the Semi Equipment companies has flattened out.

Continue reading Semiconductor Canaries: Chirp, Warble… Soon a Croak and Silence?